Gulf Finance House 3Q10 Financials: A Train Wreck

Studio Lévy & fils  1895
When You Turn the Corner Make Sure the Track Goes There

Get out your magnifying glasses and join me in reading the full 3Q10 financials that GFH submitted to the Dubai Financial Market Wednesday morning. Since I've got my soapbox out for a later tirade, I might as well take this opportunity to suggest to the  DFM that they invest a few dirhams in upgrading their electronic imaging system for faxes they receive. There really is no good reason in this day and age that the output cannot by A4 size.

Looking at the financials we see from Note 12, that GFH's US$115 million loss was primarily caused by provisions. Some US$101 million of them. But not provisions for investments. Rather US$60.5 million for an investment banking service receivable. And US$36 million from the sale of investments. I guess if one sells assets of "volatile" quality, one might expect some "volatility" in the receivables from the sales.

That being said, GFH has continued to maintain in its Other Assets the US$134 million "magical asset provision" and US$161.8 million in "Financing to Projects".

Another unfortunate trend is operating income which is running US$60.7 million negative for the first nine months of 2010 as compared to US$36.7 million for the comparable period the previous year. This is due to a collapse in revenues. On the cost side GFH has actually done quite nicely in bringing costs down.  But, if one can't pay the light bills from operations, it's hard to see a bright future.

As a result of the net loss, GFH's CAR has slipped below the 12% minimum set by the CBB. In the financials, KPMG coyly states in Note 2: 

"Further, the capital adequacy ratio of the Group as at 30 September 2010 was below the minimum required by the regulatory ratio …"

No quantification is given. We don't know if GFH just missed the ratio and has a CAR of 11.99%. Or, if it's CAR is 1.9%. You might think that the auditors would consider it important to quantify this shortfall. It certainly is a bit of "material" information that stakeholders would like to know. And more importantly should know.

If like me that's what you think, you're disappointed by KPMG's apparent lack of action on this point. They were silent on this topic. And they did not force GFH to disclose this information in a note to the financials. It's unclear if this is due to desire not to embarrass its client. Or slavish adherence to some accountant's taqlid as to the wording used for "emphasis of matter".

Note to Central Bank of Bahrain: It might be a good idea to specify in Module PD that when the CAR regulatory threshold is breached, the Licensee state the resulting ratio with details of the calculation. And if anyone from the CBB is reading this, I'd reiterate my earlier suggestion that Module PD be amended to require that Licensees report on the BSE the more detailed of (a) what Module PD requires and (b) what they are required to report on other exchanges. There is no reason that Bahraini investors should get second rate incomplete information which is available to investors in Dubai or elsewhere.

We don't have all the information required to calculate GFH's CAR at 30 September 2010. But we can make some estimates which should give a pretty good directional sense of the CAR.

The Table below summarizes these:

	30-Jun-10	Case A	Case B
Regulatory Capital	US$   363,220	US$   248,220	US$   114,229
Total RWA	US$2,811,417	US$2,683,417	US$2,549,417
CAR	12.92%	9.25%	4.48%

Notes & Assumptions:

1. 30 June 2010 CAR is as per GFH's Basel II Pillar 3 Disclosure. 
2. The key assumption is that there is no real significant change in Regulatory Capital or Total Risk Weighted Assets (Credit, Market and Operational Risk) except for the adjustments specified in the two "cases". These adjustments are made from the 30 June figures reflected above. This is a simplifying assumption so the ratios derived will not be exact but should be "close enough" to get a good sense. 
3. Case A: US$115,000 (the 3Q10 loss) is deducted from Regulatory Capital and US$128,000 is deducted from Total RWA at 100%. 
4. Case B: US$134,000 (the "magical asset" provision) is deducted from both Regulatory Capital and Total RWA. And again at 100%.

And if you have any doubt about the realisable value of any of GFH's other assets, like those Project Financings which may very well be to the same firms whose financial condition caused their bankers to pull the GFH guarantee, it's not too much of a stretch before the CAR is negative.

The results are to say the least not encouraging. It's hard to see how even the "Prettiest" words could convince even the "wisest" of investors to put equity into this firm.

The Gulf Daily News is reporting that they've seen a GFH "Investor Presentation" in which GFH states it intends to sell assets to raise cash to pay back some US$90 million in debt maturing next year or restructure that debt. In further discussions with GFH, the GDN was told that other options being considered were an IPO of some of its mega projects (North Africa and India) or perhaps giving creditors land, shares or other of GFH's highly valuable assets. There is a danger with the latter for creditors. As the choice assets are stripped from GFH's balance sheet, remaining creditors are left with lesser ones to settle their debts. The only option not mentioned here was putting a brick from one of these projects under EJ's pillow in the hopes that the Real Estate Jinn would put US$500 million under his pillow.

It's hard to imagine a "wise" creditor putting funds into GFH. 

And it takes a bit of "optimism" to see a real future for GFH. 

You can find more posts on GFH by using the Label "Gulf Finance House".

Gulf Finance House 3Q10 Financials: GFH Continues to "Turn Corner". But Unfortunately Into Oncoming Car

Not sure how GFH will spin this, but they've announced a loss of US$115.1 million for the 3Q10 making the loss for the first nine months of the year US$162.8 million.   And, no, the optimistic US$134 million of reimbursement rights remains on the balance sheet.  So this loss is due to other problems,.  The reimbursement problem has yet to be acknowledged - which means of course that GFH is in a "world of trouble".

As a result, Shareholders' Equity is at US$303 million, well below the US$400 million TNW covenant.  As well as breaching the Central Bank of Bahrain minimum  CAR requirement.

More later when I have time.

Footnote for the Central Bank of Bahrain.
As usual, GFH has released the absolute minimum on the BSE, while releasing its entire 3Q financial on the DFM.   It's unclear why Bahraini investors should be disadvantaged.  Perhaps time to revise the regulation to require that if a firm is required to disclose more on another exchange, then it disclose the same on the BSE.

I will make no comment about the ethics of a firm that engages in such selective disclosure, particularly one that claims to follow the teachings of a noble religion.

Central Bank of Bahrain Compliance Enforcement Reports

In case you missed it, I certainly had until just recently, the CBB is publishing annual “Compliance Enforcement Reports” which provide information on actions taken by the CBB to enforce regulations.  

This is a good source of information on the types of violations that occur as well as trends year to year.  Of interest—AA certainly hopes—is the section that names violators and provides a generic description of the violation.  But this is only for some violations.  You’ll see some of the firms that have appeared on this blog as repeat offenders in the CBB’s  reports. 

Reports for 2018, 2017, and 2016 have been posted.  The 2016 report has some data on 2015.  If the past is any guide, reports for this year will be issued in January 2020. 

AA was particularly gratified by two items in the 2018 report both appearing on Page 9.  

First, the CBB levied a fine (which was upheld on appeal) on a BSE listed company that had provided a clarification to an overseas exchange, where it is cross-listed, regarding the content of a news article published in that overseas jurisdiction about the listed company’s operations.  This clarification was disseminated on the overseas exchange’s website without the same on Bahrain Bourse’s website, which was only published by the listed company, a day after, in response to the CBB’s instructions.   

Faithful readers of this blog (that would be AA) will recall a characteristic AA rant about a failure by GFH to provide the same information on its 3Q10 financials on the BSE as it did in the UAE.  

And AA’s appeal to the CBB to change disclosure rules to require the same. 

As outlined in the CBB’s  2018 report, this requirement exists as per Section OFS-5.1.19 of Rulebook Volume 6 Capital Markets.  It appears to have been imposed in January 2014, though it may have existed elsewhere in another rulebook.  

Here’s chapter and verse of OFS-5.1.19.  

For Bahraini issuers who made an offer or listed their securities outside Bahrain, and for overseas issuers who made an offer or listed their securities in Bahrain, all information of importance to shareholders made public about the issuer in other markets must be made public in Bahrain, whether or not disclosure of such information would otherwise be required by the CBB.    

Note that this requirement includes the "making of an offer" and not just listing on the BSE.

Second, the CBB sanctioned an unnamed individual investor for market manipulation during 2018.